European regulator poised to win sweeping powers in overhaul

Rules also curb high-frequency trading

European Union regulators may win powers to ban new financial instruments before they are put on sale and to force traders to reduce existing positions as part of an overhaul of the bloc’s market rules.

Lawmakers in the European Parliament will vote tomorrow on the compromise proposals, which also include curbs on high-frequency trading and speculation in commodities, according to documents obtained by Bloomberg News.

Under the plans, the European Securities and Markets Authority, or ESMA, would be empowered to “pro-actively investigate” financial instruments before they are marketed, and ban them if they pose a “significant threat,” according to a copy of the proposals drawn up by officials following talks between the assembly’s political groups.

Michel Barnier, the EU’s financial services commissioner, wants enhanced powers for regulators to police the marketing of complex financial products in a bid to bolster stability, and prevent a repeat of recent cases of misselling.

HSBC Holdings Plc, Europe’s largest bank, said this year that it is setting aside $240 million to compensate customers who were missold interest-rate swaps that later lost them money. Barclays Plc and Lloyds Banking Group Plc set aside a total of 5.6 billion pounds ($9.1 billion) to compensate clients sold payment protection insurance they didn’t need.

The European Commission declined to immediately comment on the compromise plan.

Under the parliament plans, ESMA, which coordinates the work of securities regulators in the 27-nation EU, would be able to ban products for reasons of investor protection or to ensure “the orderly functioning and integrity of financial markets,” according to the documents.

Position Elimination

The agency could also force traders to scale back or “eliminate” a position in the markets, in cases where financial stability was imperiled and national regulators had failed to act.

The parliament measures are part of an overhaul of the EU’s financial market legislation, known as Mifid. The plans must be approved by the assembly and by national governments before they can take effect.

In addition to the ESMA powers, lawmakers may also approve curbs on high-frequency trading, including fees for large numbers of canceled orders, according to the documents.

Still, the parliament may give only limited support to an attempt by Barnier to boost competition in clearing of derivatives, according to the documents.

While exchanges should, as a rule, be required to supply their trade data to rival clearinghouses, these requests would have to be assessed for any risk they may pose to financial stability, according to the documents.

The parliament will also oppose so-called interoperability arrangements between clearing firms, and will veto plans from Barnier to boost access to information used to compile market benchmark rates.